Most are not new to the concept of capital market bubbles. Everyone remembers the “tech bubble” and recently the “housing bubble” that led to the financial crash from which we have yet to fully recover. The problem with bubbles is that they are hard to predict. Is the fixed income market the next to receive the annoying “bubble” label?

Since 2009, investment flows to bonds have overwhelmed those to their equity counterparts on roughly a 9 to 1 basis (coincidentally about the exact time the markets began to rally). Currently you would be hard pressed to find any domestic debt trading at or below par value. The demand for what investors consider to be conservative choices since the market downturn of 2008-09 has been so intense that they are actually willing to pay more for less...lower yields and sometimes even worse quality debt is moving up the ladder strictly because people want it. Another issue that appears to be ignored by the investing public is the effect interest rates has on the value of a variety of fixed income securities. When interest rates go down, as they have generally trended over the last 30 years, interest rate sensitive fixed income increase in price. The reverse is true when rates go up. We are currently sitting at all time low interest rates and while they may not jump up tomorrow, I believe it is only a matter of time before the trend reverses, rates rise and prices are impacted negatively. This is often referred to as mean reversion.

Why is this relevant? 10,000 Baby-Boomers turn 65 everyday in this country. Conventional wisdom tells investors that as they approach and enter into retirement they should be more conservative with their portfolio – traditionally this means investors allocate a larger portion of their portfolio to bonds. So, here is the punch line – just as a huge portion of the population is settling in to manage portfolios and sail off into the sunset, the perfect storm is brewing. Fixed income investing is about to be turned upside down. Investors need to rethink their approach to managing risk and generating income in retirement. It seems highly unlikely that bonds will perform on a going forward basis as they have historically for the last 3 decades…it would appear to be mathematically impossible. Consider the impact, not just in terms of a dollar value, but also from an emotional and psychological standpoint if the “perceived” safe dollars in a portfolio drop dramatically. Getting off on the wrong foot (pattern of returns) in retirement can have a permanent impact on lifestyle and spending ability as we witnessed for those retiring into previous bubbles. It is time to give some thought to your investment strategy. How vulnerable are you to a fixed income bubble?